Rules 317 to 319 of the Draft Income-tax Rules, 2026 prescribe key governance, investment, and nomination provisions for approved gratuity funds to ensure their proper administration and protection of employee benefits.
Rule 317 lays down conditions regarding the establishment and management of the trust and trustees, requiring that both the fund and the trust be established in India and administered by at least two trustees. All trustees must be residents in India, and any trustee who permanently leaves India must vacate the position. Additionally, a company cannot be appointed as a trustee unless prior approval is obtained from the approving authority.
Rule 318 regulates the investment of fund moneys, permitting contributions and accrued amounts to be deposited in a Post Office Savings Bank account in India, placed in current or savings accounts with scheduled banks, or utilized for contributions under a Group Gratuity Scheme with the Life Insurance Corporation of India or another recognized insurer. Any funds not used in these ways must be invested according to the investment pattern notified by the Ministry of Finance from time to time.
Rule 319 deals with the nomination process for gratuity benefits, allowing employees to nominate one or more persons to receive the gratuity amount in the event of death before payment. Where multiple nominees are appointed, the employee must specify the share payable to each. If the employee has a family, nominations must be made only in favour of family members; otherwise, any person may be nominated until the employee acquires a family, after which a fresh nomination must be made. The rule also permits modification of nominations, provides for guardians for minor nominees, and defines “family” for both male and female employees for determining eligible beneficiaries.
Extract of Rules No. 317, 318 and 319 of Draft Income-tax Rules, 2026
Rule 317
Conditions regarding trust & trustees.
(1) The fund and the trust shall be established in India.
(2) The trust shall have at least two trustees provided that a company as defined in section 2(20) of the Companies Act, 2013 shall not be appointed as a trustee without the prior approval of the approving authority.
(3) The trustees of the fund shall be resident in India and any trustee who leaves India permanently shall vacate his office.
Rule 318
Investment of fund moneys
(1) All moneys contributed to the fund or received or accrued by way of interest or otherwise may be:-
(a) deposited in a Post Office Savings Bank Account in India; or
(b) deposited in a current account or in a savings account with any scheduled bank; or
(c) utilised for the purpose of making contributions under Group Gratuity Scheme entered into with the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 or any other insurer as defined in section 2(58) of the Income-tax Act, 2025;
(2) Any funds not deposited or used as mentioned above shall be invested in accordance with the notification of the Ministry of Finance, (Department of Financial Services) number F. No. 11/14/2013–PR dated 2nd March, 2015 published in the Gazette of India, Extraordinary, PART I—Section 1 as amended from time to time.
Rule 319
Nomination
(1) An employee may be allowed by the trustees of the gratuity fund to make a nomination conferring on one or more persons the right to receive the amount of gratuity in the event of his death, before that amount becomes payable or, having become payable, has not been paid. Such a nomination shall be made in 184 or in a form as near thereto as may be necessary.
(2) If an employee nominates more than one person under sub-rule (1), he shall, in his nomination, specify the amount or share payable to each of the nominees in such manner as to cover the whole of the amount of gratuity that may be payable in the event of his death.
(3) Where an employee has a family at the time of making a nomination, the nomination shall be in favour of one or more persons belonging to his family. Any nomination made by such employee in favour of a person not belonging to his family shall be invalid.
(4) If at the time of making a nomination the employee has no family, the nomination may be in favour of any person or persons, but if the employee subsequently acquires a family, such nomination shall forthwith be deemed to be invalid and the employee may be allowed to make a fresh nomination in favour of one or more persons belonging to his family.
(5) A nomination made by an employee may, at any time, be modified by him after giving a written notice to the trustees of his intention of doing so in 184 or in a form as near thereto as may be. If the nominee predeceases the employee, the interest of the nominee shall revert to the employee, who may thereupon make a fresh nomination in respect of such interest.
(6) A nomination or its modification shall take effect to the extent it is valid on the date on which it is received by the trustees.
(7) Where the nomination is wholly or partly in favour of a minor, the member may, for the purposes of this scheme appoint a major person of his family, to be the guardian of the minor nominee in the event of the member predeceasing the nominee and the guardian so appointed, and where there is no major person in the family, the member may, at his discretion, appoint any other person to be a guardian of the minor nominee.
(8) For the purposes of this rule, “family”, in relation to an employee, shall be deemed to consist of –
(a) in the case of a male employee, himself, his wife, his children, whether married or unmarried, his dependent parents and the dependent parents of his wife and the widow and children of his predeceased son, if any,
(b) in the case of a female employee, herself, her husband, her children, whether married or unmarried, her dependent parents and the dependent parents of her husband and the widow and children of her predeceased son, if any:
